Tuesday, May 14, 2013

Estate Planning for Unmarried Couples

The percentage of unmarried households grew 24% in the last decade. While not yet commonplace, it is no longer unusual for us as planners to have clients who are unmarried couples. For professionals working with unmarried couples, whether heterosexual or same-sex couples, it is important to plan differently for the sudden death of one of the partners because surviving partners are not entitled to the same rights as married couples. Specific planning is necessary to protect unmarried partners, because under state law these partners could be "disinherited". Pay careful attention to titling assets and providing specific disposition of assets if the parties desire the other partner to receive anything.
The Michigan intestacy statute provides that, in the absence of a Will, family members, not the unmarried partner, receive all the assets. In addition, various statutes designed to protect surviving spouses will not apply to an unmarried couple. While a properly prepared Will, with appropriate distribution provisions for the unmarried partner, insures protection of that partner above family members a Will alone cannot address all the issues an unmarried couple may face. As with any couple, due to different earning and savings potentials, assets may be held in separate accounts. Unless the account names both members of the couple as owners of the account, transfer on death designations should be used to insure that the surviving partner retains full control of the accounts. A regular review of the client’s finances can help detect potential problems and help protect the surviving partner.
Similarly, it is unlikely that the default distribution for a life insurance policy will include an unmarried spouse. In the absence of a validly prepared beneficiary designation most policies will pay out to the probate estate, which as we have discussed above, may be of no use to the surviving partner. Further, while federal retirement law provides some protections to insure that surviving spouses inherit retirement benefits, there must be a specific and valid beneficiary designation to the unmarried partner in order to inherit a retirement plan or IRA. Even then, provisions which would allow a spouse to "stretch out" IRA distributions to minimize taxes do not apply to an unmarried partner. The unmarried partner may have immediate tax consequences on receipt of qualified plan benefits.
Often unmarried partners will purchase a home together and will jointly own the house. Unless unmarried partners own the residence "as joint tenants with right of survivorship", on the death of one partner, that partner's share will go to family members rather than the surviving partner. The surviving partner may have to pay many thousands of dollars to pay off a family's claim in the house. You may even have a situation where the surviving unmarried partner is solely responsible for the mortgage, yet must still pay the family to maintain the residence.
Another major concern that an unmarried couples may not consider is who has the legal authority for care in the event of illness or disability. The couple should prepare documents that specifically state their intent that they want each other to make medical and/or legal decisions in the event of illness or disability. Similarly, because most states provide that family members control the funeral and burial arrangements, it is important to provide the surviving partner with the authority to determine how and where the deceased partner is buried.
We have discussed the use of trusts for many other reasons in prior posts. A trust can be very valuable in a situation with unmarried couples because you can specifically state where your assets (which presumably are funded to the trust prior to death) are to be distributed without worrying about any probate rules. The private, contractual nature of a trust lends itself to administering the assets of couples whose relationships lack recognition in the eyes of the law.
As you can see, the situation for unmarried couples can be fraught with problems. These problems can be avoided with careful analysis and specific drafting of documents. Assistance from a qualified professional is very helpful in these situations.

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